How Indonesia Managed to Kill its First REDD Project

Singapore. In July 2010, US investor Todd Lemons and Russian energy giant Gazprom believed they were just weeks from winning final approval for a landmark forest preservation project in Indonesia.

Now, the project is close to collapse, a casualty of labyrinthine bureaucracy, opaque laws and a secretive palm oil company.

The Rimba Raya project, on the island of Borneo, is part of a UN-backed scheme designed to reward poorer nations that protect their carbon-rich jungles.

Deep peat in some of the country’s rainforests stores billions of tons of carbon, so preserving those forests is regarded as crucial in the fight against climate change.

By putting a value on the carbon, the 90,000-hectare project would help prove that investors could turn a profit from the world’s jungles in ways that did not involve cutting them down.

After three years of work and more than $2 million in development costs, the project is proof that saving the world’s tropical rainforests will be far more complicated than simply setting up a framework to allow market forces to function.

A Reuters investigation shows the Forestry Ministry is highly skeptical about a market for forest carbon credits, placing it at odds with President Susilo Bambang Yudhoyono, who supports pay-and-preserve investments to fight climate change.

Hong Kong-based Lemons, 47, a veteran of environmentally sustainable, and profitable, projects, discovered just how frustrating the ministry can be to projects such as his.

“Success was literally two months around the corner,” he said. “We went through — if there are 12 steps, we went through the first 11 on time over a two-year period. We had some glitches, but by and large we went through the rather lengthy and complicated process in the time expected.”

That’s when the Forestry Ministry decided to slash the project’s area in half, making it unviable, and handing a large chunk of forested deep peatland to a palm oil company instead.

Unlimited Corruption

The dispute has turned a spotlight on the Forestry Ministry, which earns $15 billion a year in land permit fees from investors. The Corruption Eradication Commission (KPK) said last month that it would investigate the granting of forest permits and planned to crack down on corruption in the resources sector.

“It’s a source of unlimited corruption,” said Chandra M. Hamzah, deputy at the KPK.

Senior Forestry Ministry officials denied any wrongdoing in the Rimba Raya case and criticized the project’s backers for a deal they made with Russia’s Gazprom, the world’s largest gas producer, to market the project’s carbon credits.

The case illustrates how growing demand for land, bureaucratic hurdles and powerful vested interests are major obstacles to conservation projects in Indonesia and elsewhere in the developing world.

Showcase Project

The Rimba Raya project was meant to save a large area of carbon-rich peat swamp forest in Central Kalimantan and showcase Jakarta’s efforts to fight climate change.

Much of the area is dense forest that lies atop oozy black peat flooded by tea-colored water. Dozens of threatened or endangered species such as orangutans, proboscis monkeys, otter civets and Borneo bay cats live in the area, which is adjacent to a national park.

Rimba Raya was designed to be part of the UN’s Reducing Emissions from Deforestation and Degradation program. The idea is simple: every ton of carbon locked away in the peat and soaked up by the trees would earn a steady flow of carbon credits.

Profit from the sale of those credits would go to project investors and partners, local communities and the government. That would allow the project to pay its way and compete with palm oil farmers and loggers who might otherwise destroy it.

Rich countries and big companies can buy the credits to offset their emissions.

By preserving a large area of peat swamp forest, Rimba Raya was projected to cut carbon emissions by nearly 100 million tons over its 30-year life, which would translate into total saleable credits of about $500 million, Gazprom says.

Gold Standard

Rimba Raya got backing from the Clinton Foundation’s Climate Initiative, which helped pay for some of the early costs. Gazprom invested more than $1 million.

It was the first in the world to meet stringent REDD project rules under the Washington-based Voluntary Carbon Standard, an industry-respected body that issues carbon credits. It was also the first to earn a triple-gold rating under the Climate, Community and Biodiversity Alliance, a separate verifier.

In December 2009, the Forestry Ministry tentatively named the now Indonesian-registered company Rimba Raya Conservation the license holder for nearly 90,000 hectares, contingent on it passing an environmental impact assessment. It did so a few months later.

The ownership of Rimba Raya Conservation is split 70 percent foreign and 30 percent Indonesian, with Lemons and business partner Jim Procanik holding small stakes.

Lemons is the CEO of InfiniteEARTH a Hong Kong-based firm that is the developer and manager of the Rimba Raya project as well as investment fund-raiser. Procanik, 44, is its managing director.

In June last year, Forestry Minister Zulkifli Hasan asked for a map that would set the final boundary of the project, a document seen by Reuters showed. Once the map is issued, usually after a few weeks, a project is eligible for a license to operate.

But by September last year it was clear something was wrong. Despite repeated promises by ministry officials, the final map had not been issued. No explanations were given.

What followed instead was a series of steps by the Forestry Ministry that have undermined the project.

On Dec. 31, 2010, Best, a palm oil firm run by brothers Winarto and Winarno Tjajadi, was granted 6,500 hectares of peat swamp land for palm oil development, next to a smaller parcel of deep peatland granted a year earlier. The land granted in December was part of the original area set aside for Rimba Raya.

The Tjajadi brothers declined several requests to comment.

After months of delay, the Forestry Ministry finally ruled that Rimba Raya was only eligible for 46,000 hectares, cutting out much of the peatland covering nearly half the original project area.

Ombudsman Investigates

The case has now been brought before the office of the Indonesian government’s Ombudsman. Senior Ombudsman Dominikus Fernandes said he believed the Forestry Ministry should issue the license to Rimba Raya.

“If Rimba Raya has already fulfilled the criteria, there should not be a delay in issuing the license,” he said. “This is a model project that should be prioritized. If we don’t give an example on the assurance of investing in Indonesia, that’s not a good thing.”

Officials from the Forestry Ministry said the area was given legally for palm oil development because Best had claims to the land dating back to 2005.

Hadi Daryanto, secretary general of the ministry, stressed the peatland areas originally granted to Rimba Raya were on a type of forest called convertible production forest, which can be used for agriculture but not REDD projects. Handing that nearly 40,000 hectares to Rimba Raya would be against the law, he said.

The law also bans clearing peatland more than three meters deep. An assessment of the Rimba Raya area by a peat expert hired by InfiniteEARTH showed the peat is three to seven meters deep.

For Lemons, the mood has switched from exhilaration to bitter disappointment. “We’ve been here every day pushing like hell from every angle,” he said.

Gazprom is also upset. On June 16 it sent a letter to the Indonesian government, criticizing the failure to issue the license for Rimba Raya and threatening to abandon some $100 million clean-energy projects in Indonesia. The government has yet to respond.

Carbon Dreams?

Hadi said InfiniteEARTH’s deal with Gazprom was made in the absence of any license.

Lemons said the deal was explained in person during a presentation of a 300-page technical proposal submitted to the ministry to prove the project’s financial viability. Hadi was among a ministry panel that approved the proposal.

“One of their biggest concerns was whether REDD could deliver the same revenues to the state as other land-use permits such as palm oil, logging, mining. We were required to show contracts that demonstrated we could pay the fees and annual royalties,” Lemons said.

Gazprom said it had already agreed to long-term sales contracts with buyers at between 7 and 8 euros ($10 and $11.40) per ton — contingent on the license being issued.

“The Ministry of Forestry ought to be doing everything it can to support a program that benefits forestry as opposed to favor a program that’s there to cut it down and turn it into palm oil,” said Dan Barry, Gazprom Marketing & Trading’s London-based global director of clean energy.

‘Ahead of its Time’

Kuntoro Mangkusubroto, the head of the REDD task force in Indonesia who is also in charge of the president’s government reform unit, said the Rimba Raya case highlighted deep flaws in the bureaucracy and the need for sweeping reforms to underpin the 40 other REDD projects in the country.

“The core concern is the trust in government statements of readiness, and responsibility,” he wrote in an e-mail. “The action of the central government’s ministry and the district government’s action is not conducive for investment, especially in this new kind of venture.

“I can surmise that the case of Rimba Raya is a case of a business idea that is ahead of its time. The government infrastructure is insufficiently ready for it.”

Legal action was one solution to this case, he added.

That is a path Lemons and Procanik may eventually take but for now they have proposed a land swap deal with Best in which the firm gives Rimba Raya 9,000 hectares of peatland in return for a similar-sized piece of non-peatland held by Rimba Raya in the north of the project near other Best landholdings.

Best rejected an earlier offer by Rimba Raya of 9 percent of the credits from the project, Lemons said. Reuters